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The following OECD assessment and recommendations summarise chapter 1 of the Economic survey of Turkey published on 17 July 2008.
The challenging path from post-crisis recovery to sustainable growth
Over the past two decades Turkey has successfully shifted to a growth strategy based on open and competitive markets. However, recurrent macroeconomic instabilities slowed down trend growth. The recovery from the 2001 crisis has brought an unprecedented period of high growth and the first palpable signs of sustained catch-up and convergence. Currently Turkey is in the difficult transition period between the successful exit from “post-crisis recovery” to sustainable path of high growth. The main challenges that present themselves during this transition are:
Enabling monetary policy and inflation targeting to “go the last mile” by better setting other policies, in particular structural policies, on a firm disinflation trajectory, and ensuring that fiscal policy supports this objective.
Achieving this transition is far from trivial, as witnessed by the nervousness of financial markets, increased exchange rate volatility, growing tensions in the economy, as well as a disappointing growth performance since mid-2007. Embarking on a new, sustainable path of high growth will require policy action, but internal as well as external political tensions complicate the decision making process. Finding the right exit from the transparency-increasing and credibility-generating IMF umbrella also needs attention. However, addressing the above mentioned challenges with decisive reforms will allow Turkey to more fully exploit its comparative advantages, reap the benefits from globalisation and open capital markets and improve its resilience in the face of adverse international shocks.
Between 2002 and 2007 high growth was achieved on the back of fundamental macroeconomic and structural reforms
After the most severe of a succession of “boom and bust” cycles in 2001, a fundamental fiscal, monetary and institutional reform package was implemented. Backed by a favourable international environment and by the opening of accession negotiations with the EU, achieving an average growth rate of almost 7% in the period of 2002 07 made a welcome beginning to a process of catching up with the OECD average. Large numbers of jobs were created in industry and services amid exits from agriculture, while inflation declined. A primary fiscal surplus of around 6% of GDP was achieved for several years, and public debt was brought down and put on a sustainable path.
Increased competition from low-cost countries and strong trend currency appreciation has put pressure on labour-intensive sectors…
During the same period, accelerated capital inflows attracted by very high real interest rates and opportunities for lucrative rates of return, pushed up the exchange rate strongly in real terms – except during short periods of adverse international or domestic shocks. Trend appreciation helped with disinflation but also amplified the competitive challenges that Turkey’s traditional export industries face from lower-cost emerging countries. Sophisticated industries coped well and created new employment opportunities but traditional industries, drawing on low-skilled labour, the abundant factor resource of the Turkish economy, tended to lose market share and faced sharply accelerated import penetration. Employment in these industries declined and with re-employment being hampered by skill and regional mismatches, net employment creation of the overall economy fell clearly short of the increase in working age population. The total employment rate declined as a result and the aggregate unemployment rate slightly increased.
…underlining the need for further structural reforms to reduce Turkey’s dependence on favourable external circumstances
An external imbalance arose due to strong domestic demand fuelled by capital inflows, increasing import penetration, and the global surge in energy and raw material prices. This higher external deficit increased Turkey’s sensitivity to shifts in investor sentiment. Still, analyses developed for this Survey suggest that, in terms of economic fundamentals, Turkey’s risk assessment by financial markets could have improved more than it actually did through the 2000s. The thorough revision of Turkey’s national accounts in March 2008, resulting in GDP more than 30% higher and reducing the public debt/GDP and current account deficit/GDP ratios to relatively more benign levels, also reinforced prospects for a rating upgrade. However, this did not materialise due to the deterioration of international financial and domestic political conditions in the first half of 2008. These events reinforce the case for further structural reforms so as to reduce Turkey’s dependence on favourable external circumstances.
Domestic political and international financial conditions have further slowed growth
In early 2008 important tensions arose in the domestic political environment, with a parallel deterioration of conditions in international financial markets. The exchange rate depreciated by about 14% in the first four months of 2008. While this allowed some recouping of the earlier competitiveness losses, interest rates also increased significantly, inflation outcomes and expectations accelerated further above targets, and the growth of Turkey’s export markets slowed down. In these circumstances, consumer and business confidence weakened and macroeconomic projections for 2008 and 2009 are currently the weakest of the post 2001 period. To stimulate an upturn, confidence in the stability of the overall governance environment should be restored, and the business sector should be provided with more supportive structural conditions. A return to a stronger growth path with a pick-up in employment growth would help strengthen domestic and international confidence and improve conditions for lower risk premia, a credit rating upgrade, and further investment and growth. If this improvement takes place Turkey would then likely face again the challenges of strong real currency appreciation, and this would reinforce the case for the acceleration of structural reforms needed to cope with it.
Demand sources have been less balanced than in other catching-up economies
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Turkey 2008 is available from:
For further information please contact the Turkey Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat's report was prepared by Rauf Gönenç, Rina Battacharya, Olcay Culha and Cafer Kaplan, under the supervision of Andreas Wörgötter. Research assistance was provided by Béatrice Guérard.